Buyers may seek damages for late Covid-19 BI claims payment under Enterprise Act

Commercial insurance buyers should consider whether they can recoup costs incurred from delays in paying Covid-19-related business interruption (BI) claims, in what may become the first real test of the UK’s Enterprise Act, a leading insurance lawyer has told Commercial Risk Europe. Almost one year after the first UK coronavirus lockdown in March 2020, many companies are still waiting for insurers to pay claims for BI losses related to the pandemic. Initially, the insurance industry argued that property insurance policies did not cover BI from pandemics, forcing policyholders and the UK regulator to put the issue before the courts. In January 2021, that process came to a definitive end when the Supreme Court ruled in favour of policyholders. Most companies have struggled with cashflow during the pandemic and, in the absence of insurance payouts, some are likely to have taken out loans or even gone bust. And commercial policyholders or liquidators may be able to use the UK’s Enterprise Act (the Act) to claim additional costs incurred as a result of “unreasonable delays” in BI claims payment from Covid-19 infections and government lockdowns. The Act potentially applies to all policies bought in the UK and London market. But commercial policies can contract out of the rules if insurers meet transparency requirements under the UK’s Insurance Act. “Many companies lodged BI claims with insurers almost a year ago and may now be in dire financial straits. Where ‘unreasonable delays’ in claim payments have led to additional costs, such as the need to take out commercial loans, they may be able to recover those costs from insurers under the Enterprise Act,” said Stephen Netherway, a partner at independent law firm Devonshires. Having come into force on 4 May 2017, the Enterprise Act 2016 gave commercial policyholders a route to claim damages for late payment of insurance and reinsurance claims. The Act does not prevent insurers investigating or disputing claims, but enables policyholders to seek damages for unreasonable delays in payment of valid claims. Less than five years since implementation, the Act is relatively untested, with no substantial case law for guidance. However, disputes over BI claims related to the pandemic could be the first real test for the legislation, said Mr Netherway. “During the pandemic and lockdowns, companies have been under huge amounts of stress, and some may have had to take out commercial loans at extortionate rates – loans they may not have taken out if they had had their claim paid by insurers,” according to Mr Netherway. “This is a ticking timebomb. Where claims payments have been unreasonably delayed, then a further damages claim by policyholders can be brought on top of the claim payment. The pandemic is almost a paradigm example for the Act’s intervention: If a business has failed because of a delay in claims payment, then the Act should permit damages to be claimed for that business failure,” he said. The most affected businesses are likely to be small to medium-sized enterprises, but that is not to say larger corporates will not make claims for late payment, said Mr Netherway. “This is something that risk managers and commercial buyers will need to ‘tick off’ when their claims are settled and paid. They should consider whether their claim has been paid quickly and if they have incurred additional costs due to any delay. The Enterprise Act will give large companies a potential avenue to recover legitimate additional costs,” he said. For insurers, potential damages for late payment would inflate the size of BI losses and require further reserves, explained Mr Netherway. If courts find there are grounds for policyholders to claim damages for late payment under the Act, claimant solicitors could see this as an opportunity. According to the Financial Conduct Authority (FCA), some 370,000 policies may be affected by the test case. “It has yet to be shown whether damages for late payment related to Covid BI claims will materialise into a significant exposure for insurers, but it is the case that all parties should at least look at the provisions for late payment [under the Act] and their impact. They need to be proactive and have these provisions [in the Act] in mind,” said Mr Netherway. It is likely the courts would need to interpret the Act as it applies to coronavirus BI claims, he continued. “Courts may need to test issues regarding the application of the Enterprise Act for Covid-related BI claims. There is little case law giving pointers in areas like how the Act is triggered or what might constitute an unreasonable delay,” he said. For example, there could be questions about what constitutes ‘unreasonable delay’ in the context of the FCA test case. Insurers might argue they followed the legal process in waiting for the Supreme Court judgment in January before processing claims. However, policyholders can argue insurers could have paid claims following the High Court ruling in November, rather than await the outcome of appeals. Following the High Court ruling in November, the FCA told insurers to process claims in preparation for the Supreme Court judgment, rather than halt the process pending appeals. “Was it ever sufficient for insurers to delay payment because they wanted to see finality from the courts? This could be a further hidden exposure, not reserved for by many insurers and not necessarily a risk that reinsurers would accept they should pay. This is another incentive for insurers now to make speedy payments,” said Mr Netherway. Following the Supreme Court judgment in January, the FCA wrote to the CEOs of insurers reminding them to pay BI claims promptly, or face regulatory sanctions. It also said where there are further disputes subject to legal proceedings, insurers should consider the significant costs faced by policyholders bringing legal proceedings to clarify any remaining areas of uncertainty.

Buyers may seek damages for late Covid-19 BI claims payment under Enterprise Act

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